Tag: Tax Savings

Starting late last year, some predicted that the 2018 tax changes would cripple the housing market. Headlines warned of the potential for double-digit price depreciation and suggested that buyer demand could drop like a rock. There was even sentiment that homeownership could lose its coveted status as a major component of the American Dream.

Now that the first quarter numbers are in, we can begin to decipher the actual that impact tax reform has had on the real estate market.

1. Has tax reform killed off home buyer demand? The answer is “NO.”

According to the Showing Time Index which “tracks the average number of buyer showings on active residential properties on a monthly basis” and is a “highly reliable leading indicator of current and future demand trends,” buyer demand has increased each month over the last three months and is HIGHER than it was for the same months last year. Buyer demand is not down. It is up.

2. Have the tax changes affected America’s belief in real estate as a long-term investment? The answer is “NO.”

Two weeks ago, Gallup released its annual survey which asks Americans which asset they believed to be the best long-term investment. The survey revealed:

“More Americans name real estate over several other vehicles for growing wealth as the best long-term investment for the fifth year in a row. Just over a third cite real estate for this, while roughly a quarter name stocks or mutual funds.”

The survey also showed that the percentage of Americans who believe real estate is the best long-term investment was unchanged from a year ago.

3. Has the homeownership rate been negatively impacted by the tax changes? The answer is “NO.”

Not only did the homeownership rate not crash, it increased when compared to the first quarter of last year according to data released by the Census Bureau.

“We have been of the opinion that homeownership is most highly correlated with income and the net effect of tax reform would be a positive, rather than negative catalyst for the homeownership rate. While still in the early innings of tax changes, this has proven to be the case.”

4. Has the upper-end market been crushed by new State and Local Taxes (SALT) limitations? The answer is “NO.”

5. Will the reforms in the tax code cause home prices to tumble over the next twelve months? The answer is “NO.”

According to CoreLogic’s latest Home Price Insights Report, home prices will appreciate in each of the 50 states over the next twelve months. Appreciation is projected to be anywhere from 1.9% to 10.3% with the national average being 4.7%.

Bottom Line

The doomsday scenarios that some predicted based on tax reform fears seem to have already blown over based on the early housing industry numbers being reported.

Homeowners who itemize tax deductions can deduct the interest on up to $750,000 of mortgage balances used to buy, build or improve a qualified home. Here’s how to figure out the impact of that tax deduction: What’s your marginal income tax bracket? In our example, we’re going to use a tax bracket of 24%.
What’s your mortgage rate? In our example, we’re going to use a mortgage rate of 5%.

In this example, a 5% mortgage costs 3.8% after-taxfor someone in a 24% tax bracket.

Contact me for more info or to explore your options!

PLEASE NOTE: THIS ARTICLE AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936. Also, this article is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate. Payment examples don’t include property taxes and home insurance.

Owning a home has great financial benefits, yet many continue renting! Today, let’s look at the financial reasons why owning a home of your own has been a part of the American Dream for as long as America has existed.

“With Rents continuing to climb and interest rates staying low, many renters find themselves gazing over the homeownership fence and wondering if the grass really is greener. Leaving aside, for the moment, the difficulties of saving for a down payment, let’s focus on the monthly expenses of owning a home: it turns out that renters currently paying the median rent in many markets could afford to buy a higher-quality property than the typical (read: median-valued) home without increasing their monthly expenses.”

What proof exists that owning is financially better than renting?

1. The latestRent Vs. Buy Report from Trulia pointed out the top 5 financial benefits of homeownership:

Mortgage payments can be fixed while rents go up.

Equity in your home can be a financial resource later.

You can build wealth without paying capital gain.

A mortgage can act as a forced savings account

Overall, homeowners can enjoy greater wealth growth than renters.

2. Studies have shown that a homeowner’s net worth is 45x greater than that of a renter.

3. Just a few months ago, we explained that a family buying an average priced home at the beginning of 2017 could build more than $42,000 in family wealth over the next five years.

4. Some argue that renting eliminates the cost of taxes and home repairs, but every potential renter must realize that all the expenses the landlord incurs are already baked into the rent payment –along with a profit margin!!

Bottom Line

Owning a home has always been, and will always be, better from a financial standpoint than renting.

1 – House Price AppreciationTHREE REASONS WHY BUYING A VACATION HOME COULD BE A GREAT INVESTMENT

The average rate of house price appreciation in the US over the past 20 years has been over 3% per year. This means that if you bought a vacation home 20 years ago for $100,000, it would likely be worth over $180,000 today. If you used a 20% down payment, your $20,000 investment would have yielded more than an 8% annual rate of return.

2 – Ability to Rent Out the Property and/or Save Money on Hotels

You may be able to rent the property for part of the year that you’re not using it. Additionally, you could save some money on hotel bills if you vacation in your own property instead of vacationing in a hotel. These factors could help you to reduce your cost of ownership.

3 – Step-up in Tax Basis

If you keep the property for your entire lifetime, your heirs will likely receive a “step-up in basis” when they inherit the property. This means that their tax basis “steps up to” the future value of the property. In our example above, if the property is worth $180,000 when your heirs inherit it, their tax basis would be $180,000. This means that they could sell the property and pay absolutely nothing in capital gains taxes.

If you take out a mortgage for home improvement purposes, the IRS may ask you to prove the project was a “substantial improvement” that:

Adds to the value of the home,

Prolongs the home’s useful life, or

Adapts the home to new uses. For example, painting a room may not qualify, but an addition or new kitchen may qualify.

Keeping the receipts from your home improvement project would go a long way toward proving this. Also, keep in mind that the IRS gives you 24 months to reimburse yourself for improvements made in the past, or 12 months to complete future improvements. For more details, please reference IRS Publication 936, and see my article called, Three Things You Should Know About Pulling Cash Out for Home Improvement.

2: Ability to Reduce Your Capital Gains Tax:

Capital Gain is calculated by taking your sales price, minus your costs of selling the house, minus your “tax basis” (see illustration). Tax basis is the total cost of buying, building or improving your house. When you make a “substantial improvement”, the cost of the home improvement is added to your tax basis. This reduces your capital gain when you sell the house, and it could save you quite a bit of money on capital gains taxes. That’s another reason why it’s important to keep your home improvement receipts.

Please see a CPA for further details on the deductibility of mortgage interest or the capital gains tax in your specific scenario. Contact me for further information on your mortgage options.